Lumentum Holdings Inc (NASDAQ: LITE) reached an agreement to acquire Oclaro Inc (NASDAQ: OCLR) in a deal that makes "strong strategic sense" for the companies and highlights the longer-term potential of the optical sector, according to Craig-Hallum Capital Group.

The Analyst

The Thesis

Oclaro's combination with Lumentum makes sense on a strategic and financial level, Shannon said in a Tuesday report.

On the strategic front, Oclaro provides a strong leading edge product in the telecom industry with coherent transmission products, an area where Lumentum has lagged in recent quarters, the analyst said. On the financial front, the combination should be accretive to Lumentum's business by around 10 percent based on expectations of $60 million in annual synergies, he said.

Lumentum's acquisition is also a "potential starting point" for increased consolidation activity within the optical space, Shannon said. The industry has become too fragmented, and Lumentum's M&A deal will likely "spark other moves," he said — meaning optical stocks are likely to become "healthier," with more favorable longer-term pricing.

Lumentum is one of Craig-Hallum's top ideas for 2018, the analyst said.

Price Action

Lumentum shares were trading down slightly at $71.95 late Tuesday afternoon.